Oxford Bank & Trust v. Hartford Accident & Indemnity

No. 3--97-0627

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT

OXFORD BANK AND TRUST, f/k/a ) Appeal from the Circuit Court
Addison State Bank, ) of Du Page County.
)
Plaintiff-Appellee, )
)
v. ) No. 92--MR--428
)
HARTFORD ACCIDENT AND )
INDEMNITY COMPANY, ) Honorable
) John W. Darrah,
Defendant-Appellant. ) Judge, Presiding.


JUSTICE RATHJE delivered the opinion of the court:

Defendant, Hartford Accident & Indemnity Company, appeals from
the judgment of the circuit court of Du Page County, which found
defendant liable on the claim made pursuant to an indemnity bond by
plaintiff, Oxford Bank & Trust Company, f/k/a Addison State Bank.
Said liability totaled $251,459.93, a sum which included statutory
prejudgment interest.
On appeal, defendant raises four arguments, namely, (1) that
the subject loss suffered by plaintiff was not covered because the
acts of bank official, James Porcaro, were neither dishonest nor
fraudulent and Porcaro did not have manifest intent to cause harm
to defendant; (2) that the loss was not covered because it arose
out of a loan and, further, that Porcaro did not act in collusion
with Kenneth Vincenzo, Sr., nor did he obtain a financial benefit
with a value of $2,500; (3) that the trial court erred in granting
plaintiff s motion for summary judgment as to defendant s second
affirmative defense; and (4) that plaintiff s loss is excluded
under the exclusion governing uncollected deposits.
The following facts are taken from the record on appeal.
Defendant issued a fidelity bond to plaintiff that was in effect
from January 1, 1989, to January 1, 1992. This fidelity bond
agreement provided defendant with coverage for:
"(A) Loss resulting directly from dishonest or fraudulent
acts committed by an Employee acting alone or in collusion
with others.
Such dishonest or fraudulent acts must be committed by the
Employee with the manifest intent:
(a) to cause the Insured to sustain such loss, and
(b) to obtain financial benefit for the Employee or
another person or entity.
However, if some or all of the Insured s loss results directly
or indirectly from Loans, that portion of the loss is not
covered unless the Employee was in collusion with one or more
parties to the transactions and has received, in connection
therewith, a financial benefit with a value of at least
$2,500.00."
Further, the bond defines loan as:
" 'all extensions of credit by the Insured and all
transactions creating a creditor relationship in favor of the
Insured and all transactions by which the Insured assumes an
existing creditor relationship.' "
Also, the subject bond contained the following pertinent
exclusions:
"(e) loss resulting directly or indirectly from the
complete or partial nonpayment of, or default upon, any Loan
or transaction involving the Insured as a lender or borrower,
or extension of credit, including the purchase, discounting or
other acquisition of false or genuine accounts, invoices,
notes, agreements or Evidences of Debt, whether such Loan,
transaction or extension was procured in good faith or through
trick, artifice, fraud or false pretenses, except when covered
under insuring Agreement (A), (D), or (E).
* * *
(o) loss resulting directly or indirectly from payments
made or withdrawals from a depositor s account involving items
of deposit which are not finally paid for any reason,
including but not limited to Forgery or any other fraud,
except when covered under Insuring Agreement (A)."
In October 1991, James Porcaro was hired by plaintiff to the
position of vice-president, cashier, and chief operating officer.
His primary duty was to run plaintiff s day-to-day banking
operations, including the overseeing of checking accounts. When
hired by plaintiff, Porcaro had been working in the banking
business for 22 years. From his experience, Porcaro knew the
warning signs that a customer was involved in a check-kiting
scheme.
Testimony at trial described the nature of check kiting, which
occurs when a person draws on an account at one bank, deposits the
checks in another bank, and then secures the cash before the
checks actual collection by the first bank. Further, check kiting
involves the continual movement of funds from bank to bank. Due to
such a scheme, the check-kiting customer s account will show a
positive balance due to deposits into the account. However, these
are "ledger balances" which do not represent actual funds in the
subject account. If the scheme is successful, a bank will be left
with an overdraft balance.
Early in Porcaro s tenure with plaintiff he had prepared a
report on a prior check-kiting scheme, which was forwarded to the
Federal Bureau of Investigation. Because of this prior scheme,
plaintiff s president, Ronald Peterson, had expressly directed
Porcaro to be on the alert for evidence of possible check kiting
involving any of plaintiff s accounts. Peterson instructed Porcaro
to review personally each large check over $2,500, along with the
check s endorsement. This daily inspection was necessary to
determine if a check-kiting scheme was afoot. Further, Peterson
told Porcaro to inform him of any actual or potential check kites
in any customer s account. Without Peterson s prior approval,
Porcaro was not authorized to approve any overdrafts exceeding
$25,000.
Prior to his employment with plaintiff, Porcaro had been
employed for 10 years as vice-president and cashier of Lakeside
Bank (Lakeside). During his time at Lakeside, Porcaro came to know
a Lakeside customer by the name of Kenneth Vincenzo, Sr.
(Vincenzo), who ran an automobile auction business. Vincenzo had
a collections account, which meant that Lakeside, in a fiduciary
role, held title to automobiles for its sellers. Typically, prior
to the issuance of the seller s title, Lakeside had to receive the
actual funds collected from the customer. When it had received the
money, Lakeside would then release the title to the automobiles and
pay the seller with an official bank check or cashier s check.
While at Lakeside, Porcaro authorized the release of
automobile titles to Vincenzo and, in one instance, issued a
Lakeside check to Vincenzo in excess of $80,000 against uncollected
funds. As a result of this transaction, Lakeside lost over
$30,000. Following this incident, Lakeside s executive vice-
president, Norman Arnos, told Porcaro that he believed Porcaro s
behavior in this incident was very unusual. Arnos subsequently
reported Porcaro s involvement in this incident to Lakeside s
executive committee.
After being hired by plaintiff, Porcaro informed Vincenzo that
he was working for plaintiff. On January 18, 1991, Vincenzo opened
an account with plaintiff. Based on plaintiff s practice, Porcaro
was the bank officer in charge of this account. Vincenzo also
maintained an account at Old Second Community Bank of North Aurora
(Old Second).
In the first month after opening the subject account, Vincenzo
deposited approximately $43,000 into the subject account from his
Old Second account. Within a short time, overdrafts in Vincenzo s
account with plaintiff began to occur. Gloria Distel, plaintiff s
bookkeeping manager, who reported directly to Porcaro, informed him
of the overdrafts, asking whether to approve or deny the overdraft.
On each occasion, Porcaro told Distel to approve the overdraft; he
advised her that "there would not be a problem."
In February 1991, Vincenzo deposited approximately $362,000
into his account with plaintiff from his accounts at other banking
institutions. During this month, there were separate overdrafts on
the subject account. At the same time, Vincenzo was moving large
checks in amounts up to $65,000 to and from his Old Second account.
Further, in March 1991, Vincenzo, from a variety of his other
accounts, deposited $1,628,800 into his account with plaintiff.
Numerous large checks, including one for $156,000, were drawn on
Vincenzo s Old Second account and deposited in the subject account.
At the same time, virtually identical large withdrawals were made
from the subject account payable either to Vincenzo or one of his
businesses, which were then deposited in his Old Second account.
In this month, Porcaro approved of overdrafts on the subject
account of $17,152.91, $54,312.07, $113,955.54, $57,979.07,
$6,904.72, and $140,808.52. At this time, Distel told Porcaro that
the overdrafts on Vincenzo s account were "suspicious." Porcaro
assured Distel that Vincenzo would take care of the overdrafts and
told Distel to pay them. Porcaro further stated to Distel that
there was no check kite in Vincenzo s account.
In April 1991, over $3 million moved through Vincenzo s
account with plaintiff. Again, large checks were drawn on
Vincenzo s Old Second account and deposited into the subject
account. At the same time, virtually identical amounts were
withdrawn from the subject account, payable to Vincenzo or one of
his businesses. Once again, Distel told Porcaro of her belief that
Vincenzo was engaged in a check-kiting scheme. Porcaro s response
was the same as before, i.e., that there was no problem with
Vincenzo s account.
In April 1991, plaintiff instituted a computerized check-kite
detection system (system), which was under the direction of Thomas
Goshhorn, plaintiff s comptroller. The system s first report was
produced on April 25, 1991. Therein, Vincenzo s account was
identified as containing a potential check kite. Goshhorn reviewed
the report and verified its information regarding the activity
pertaining to the account. Goshhorn then discussed the report with
plaintiff s vice-president, Effie Kastritis. Subsequently, on the
same day, Kastritis and Goshhorn met with Porcaro regarding the
report. Porcaro maintained that there was no check kite in
Vincenzo s account. He asked for and was given the report. The
report, which could not be duplicated, was never seen again.
On April 26, 1991, Porcaro issued a cashier s check to
Vincenzo for $20,205 on uncollected funds. On May 6, 1991, Old
Second returned three checks amounting to $228,000, for
insufficient funds. These three checks had created a $228,000
ledger entry with plaintiff. However, the return of the checks
created an overdraft balance in Vincenzo s account of $195,907.95.
Prior to the presentation of these three checks, Vincenzo s account
had a balance of $32,097.05.
Vincenzo s account was closed immediately, and Porcaro was
fired in the first week of May 1991. Further, during his brief
tenure with plaintiff, Porcaro embezzled a total of $11,168.74 in
plaintiff s funds. These acts of embezzlement, to which Porcaro
pleaded guilty, occurred on 10 separate dates in November 1990 and
January, February, March, and April 1991. Subsequently, the
Federal Deposit Insurance Corporation (FDIC) entered an order of
prohibition against Porcaro, which denied him employment in the
banking business without the FDIC s express authorization. Also,
on October 16, 1992, Vincenzo pleaded guilty to bank fraud in the
instant check-kiting scheme.
On July 29, 1991, plaintiff submitted a claim to defendant to
recover losses from the check-kiting scheme. On January 7, 1992,
defendant denied plaintiff s claim. On July 7, 1992, plaintiff
filed its complaint against defendant.
Count I sought a declaratory ruling that, pursuant to section
(A) of the bond, defendant had a duty to indemnify plaintiff for
losses it had sustained due to Porcaro s embezzlement and the
Porcaro/Vincenzo check-kiting scheme. Count II sought a
declaratory ruling that, pursuant to section (B) of the bond,
defendant had a duty to indemnify plaintiff for the losses it had
sustained as a result of Porcaro s embezzlement and the check-
kiting scheme. Count III alleged a breach of implied good faith
and fair dealing against defendant and sought a judgment of at
least $238,000. Count IV alleged unreasonable and vexatious delay
in settling plaintiff s claim in violation of the Illinois
Insurance Code (215 ILCS 5/155 (West 1992)). Count IV sought
attorney fees and costs, as well as punitive damages.
Defendant subsequently filed its answer and affirmative
defenses, the latter of which relied on the above-cited bond
exclusions (e) and (o), for "loan loss" and "uncollected funds,"
respectively. The trial court later granted plaintiff s motion for
summary judgment as to the affirmative defense tied to "loan loss,"
finding that plaintiff s losses were not the result of a "meeting
of minds" necessary to constitute a loan. Defendant s motion for
summary judgment was denied. The matter proceeded to a bench
trial, which was held in July 1997.
At the conclusion of the trial, the trial court entered its
judgment order, which stated in pertinent part:
"3. That James Porcaro was the cashier and chief
operating officer at Plaintiff Oxford Bank and Trust Company
from October, 1990 to May, 1991.
4. That Kenneth Vincenzo, Sr. opened a checking account
at the Plaintiff Oxford Bank and Trust Company in January,
1991, and the bank officer responsible for that account was
James Porcaro.
5. That shortly thereafter a course of conduct ensued
which involved the deposit and re-deposit of certain
instruments which were drawn on funds purportedly on deposit
and in the account of Kenneth Vincenzo, Sr. at Plaintiff
Oxford Bank and Trust Company and an account of Kenneth
Vincenzo, Sr. at The Old Second Community Bank of North
America. Said course of conduct is known in the banking
industry as a check kiting scheme.
6. That as a result of this scheme, large overdrafts
occurred in the Kenneth Vincenzo, Sr. account at Plaintiff
Oxford Bank and Trust Company. These overdrafts were approved
for payment by James Porcaro; and as a result thereof,
Plaintiff Oxford Bank and Trust Company suffered a loss in the
amount of One-Hundred Ninety-Five Thousand Nine-Hundred Seven
Dollars and Ninety-Five Cents ($195,907.95).
7. That it is clear and convincing that the loss
resulted directly from the dishonest or fraudulent acts
committed by James Porcaro acting alone or with another and
were committed by James Porcaro with the manifest intent to
cause the Plaintiff Oxford Bank and Trust Company to sustain
such loss and to obtain financial benefit for another person,
Kenneth Vincenzo, Sr. based on the following acts and
circumstances surrounding the acts and conduct of James
Porcaro in his capacity as an officer of the Plaintiff Oxford
Bank and Trust Company.
A. James Porcaro had been charged with responsibility to
implement a check kiting detection plan, to personally review
all checks in the amounts of $25,000 or larger, and to report
to the bank president any suspicion of check kiting in a
customer s account.
B. James Porcaro and Kenneth Vincenzo, Sr. had a prior
relationship at another financial institution, Lakeside Bank,
which suffered a loss when James Porcaro, as an officer and
employee of Lakeside Bank, authorized the release of
automobile titles being held as collateral and issued checks
at the request of Kenneth Vincenzo, Sr. against uncollected
funds.
C. That in March and April of 1991, Plaintiff Oxford
Bank and Trust Company s bookkeeping manager advised James
Porcaro that the activity in the Kenneth Vincenzo, Sr. account
was suspicious as a check-kiting scheme, all of which James
Porcaro denied.
D. That on or about April 25th, a check kite report was
obtained from an outside source by the Plaintiff Oxford Bank
and Trust Company, indicating a possible check kite in the
Kenneth Vincenzo, Sr. s account. James Porcaro denied that
the check kite was occurring, and the report, which was last
seen in the possession of James Porcaro, has never been found.
E. After being so advised of the suspected check kite in
the Kenneth Vincenzo, Sr. account, James Porcaro continued to
issue Cashier s Checks to Kenneth Vincenzo, Sr. against funds
which were not on deposit.
F. That James Porcaro continued to approve overdrafts
regarding the Kenneth Vincenzo, Sr. account in excess of James
Porcaro s authority of $25,000; and at no time did he report
to the bank s president any suspicion of check kiting in
Kenneth Vincenzo, Sr. s Account notwithstanding the foregoing
knowledge and with James Porcaro s specific duty in this
regard.
G. That James Porcaro, with his background and
experience in the banking industry and his position at
Plaintiff Oxford Bank and Trust Company, knew or reasonably
should have known that a check kite scheme was occurring in
the account held by Kenneth Vincenzo, Sr. at Plaintiff Oxford
Bank and Trust Company between February and May of 1991.
8. That the denial of claim by Defendant Hartford
Accident and Indemnity company was not [an] unreasonable and
vexatious evaluation of the Plaintiff Oxford Bank and Trust
Company claim or interpretation of the applicable policy
provisions.
9. That the loss suffered by Plaintiff Oxford Bank and
Trust Company is easily ascertainable by computation, and
Oxford Bank and Trust Company is entitled to statutory pre-
judgment interest from the date that the proof of loss was
filed on July 30, 1991, with the Defendant Hartford Accident
and Indemnity Company."
The trial court then entered a judgment in plaintiff s favor
of $251,459.93, which included $55,551.98 in statutory prejudgment
interest. Further, the trial court denied plaintiff s claim for
damages due to defendant s allegedly unreasonable and vexatious
handling of plaintiff s claim.
Initially, defendant argues that the loss is not covered under
coverage (A) of the subject bond. In support of this contention,
defendant asserts that Porcaro s conduct was not fraudulent or
dishonest. Defendant also maintains that he did not act with
manifest intent to cause harm to the plaintiff. In contrast,
plaintiff argues that the trial court correctly found that
Porcaro s action was fraudulent or dishonest and that Porcaro acted
with a manifest intent to cause plaintiff, Oxford, to sustain a
loss pursuant to the bond.
A court of review will not overturn the trial court s
conclusion in a bench trial unless it is against the manifest
weight of the evidence. In re Estate of Elson, 120 Ill. App. 3d
649, 655 (1983). Moreover, the reviewing court will not reverse a
judgment following a bench trial unless the opposite conclusion is
clearly evident. Interstate Material Corp. v. The City of Chicago,
273 Ill. App. 3d 527, 529 (1995).
We will first address that portion of defendant s argument
that Porcaro s actions were not dishonest. It is evident from the
case law that the term "dishonest" in relation to fidelity bonds
has a rather broad definition. (See, e.g., Home Indemnity Co. v.
Reynolds & Co., 38 Ill. App. 2d 358, 375 (1962).) It has been
interpreted to mean an act that is manifestly unfair to the
employer and that palpably subjects it to potential loss. Home
Indemnity, 38 Ill. App. 2d at 375. Although such an action may not
technically be criminal in nature, it nevertheless shows a
significant lack of probity, integrity, or trustworthiness. Home
Indemnity, 38 Ill. App. 2d at 375. Moreover, the specific act
need not be one involving an employee s criminal liability, nor is
it necessary that the employee personally benefits from the act.
Home Indemnity, 38 Ill. App. 2d at 375.
Initially, defendant contends that the trial court should not
have relied on the prior relationship of Porcaro and Vincenzo at
Lakeside Bank in determining this case. In effect, defendant
contends that this evidence is similar to inadmissible evidence in
a criminal trial that only demonstrates that the defendant has
committed bad acts in the past. We do not agree. Clearly, the
evidence of Porcaro s and Vincenzo s past relationship at Lakeside
was admissible to demonstrate generally their modus operandi. See
People v. Oaks, 169 Ill. 2d 409, 454 (1996).
Next, defendant maintains briefly that the trial court s
finding that Porcaro issued cashiers checks on uncollected funds
is not supported by the record. Specifically, the trial court
wrote, "After being so advised of the suspected check kite in ***
the Vincenzo *** account, James Porcaro continued to issue
Cashier s checks [sic] to *** Vincenzo ***." Technically,
defendant s contention is correct, i.e., there were enough funds in
Vincenzo s account on April 26, 1991, to cover the cashier s check
made out to Vincenzo in the amount of $20,205.00. However, given
the unrefuted evidence of the scheme perpetrated by Vincenzo at
that time, this erroneous finding is of little moment.
In support of its assertion that Porcaro was not engaged in
dishonest activity, defendant cites numerous cases, most of which,
as plaintiff points out, deal with instances of embezzlement and,
thus, have little relevance in this check-kiting case. The case
cited by defendant that is most similar to the appeal at bar is
Rock Island Bank v. Aetna Casualty and Surety Co., 706 F.2d 219
(7th Cir. 1983). In Rock Island, the bank president issued seven
letters that committed the bank to assume loans or to honor drafts
payable to a customer s account. These letters of commitment
contravened two of the bank s resolutions. The letters were not
reflected in the bank s books of account, nor were they disclosed
to bank examiners. However, files of the transactions were kept at
the bank, and the bank president testified that other officials of
the bank were aware of the transactions. Rock Island, 706 F.2d at
220-22.
The trial court granted the plaintiff bank s motion for
summary judgment. In reversing the granting of summary judgment,
the Rock Island court stated, inter alia, that the evidence of
deceptive conduct was not unequivocal. Further, the Rock Island
court noted, inter alia, that the bank president did not personally
profit from the transaction and concluded that one could reasonably
find from the record that the loss was due to errors in judgment,
incompetence, or negligence. Rock Island, 706 F.2d at 222.
Contrary to Rock Island, the appeal at bar went to trial, at
the conclusion of which the trial court ruled for the plaintiff.
Moreover, in Rock Island, the only allegedly dishonest act
committed by the bank president was that of exceeding his
authority. In the appeal at bar, Porcaro s actions were of a far
different nature. After being employed by plaintiff, Porcaro was
charged with reviewing all large checks and reporting any suspicion
of check kiting to plaintiff s president. In March and April 1991,
plaintiff s bookkeeper went to Porcaro with her suspicions that the
activity in Vincenzo s account indicated a check-kiting scheme.
Porcaro ignored her concerns. He never alerted the president to
the suspicious activity related to Vincenzo s account. When
confronted on April 25, 1991, with a report from plaintiff s new
check-kiting detection system, which indicated potential check-
kiting activity in Vincenzo s account, Porcaro further denied that
any such scheme was occurring. He then took the report, which was
never seen again. Within 10 days, three checks totaling $228,000
were returned to plaintiff for insufficient funds. Based on this
evidence, Porcaro s actions of failing to fulfill his job duties,
ignoring obvious evidence of Vincenzo s check-kiting scheme, and
steadfastedly denying such a scheme when confronted with clear
evidence of it were properly characterized by the trial court as
dishonest.
We find that the trial court s conclusion as to the dishonesty
of Porcaro s actions is supported by the evidence.
Next, defendant argues that the trial court erred in finding
that Porcaro s actions exhibited a manifest intent to harm
plaintiff. The term "intent" has been described as denot[ing]
that the actor desires to cause the consequences of his action or
believes that the consequences are substantially certain to result
from it." Aetna Casualty & Surety Co. v. Freyer, 89 Ill. App. 3d
617, 620 (1980). "Manifest intent" occurs when the circumstances
indicate that a particular result is "substantially certain" or is
"apparent or obvious" as a result of the employee s actions.
Heller International Corp. v. Sharp, 974 F.2d 850, 859 (7th Cir.
1992).
Defendant maintains that Porcaro s conduct could be
characterized as negligent or indicative of poor business judgment
but does not manifest intent to harm plaintiff. For example,
defendant points out that when the overdrafts began Porcaro
contacted Vincenzo, who then made a deposit into his account with
plaintiff. Defendant reasons that if Porcaro had manifest intent
to harm plaintiff he would not have taken steps to rectify the
problem. Defendant contends that the evidence of Porcaro's initial
attempts to get Vincenzo to cover the overdrafts would, if coupled
with other evidence of his properly performing his job, serve to
support this argument regarding lack of manifest intent to harm
plaintiff. However, as demonstrated above, there is more than
enough material evidence of Porcaro s willful failure to perform
his job to outweigh any examples of his attempts to pursue his
employer s interests.
Again, the various cases cited by defendant are unpersuasive.
For example, in First Federal Savings & Loan Ass'n. v. Transamerica
Insurance Co., 935 F.2d 1164 (10th Cir. 1991), a loan officer made
three loans, all of which ended in default. In each circumstance,
the loan officer initially turned down the loan application. The
loan officer then approved the loan to another party, and the First
Federal court found that the loan officer s actions indicated his
poor business judgment, not the manifest intent to harm his
employer.
First Federal presents a far different situation than is
present in the appeal at bar. There, the loan officer s actions
could be chalked up to bad decision making. Here, there is no such
evidence. Porcaro s actions did not demonstrate a lack of good
business sense. Instead, they reflected a reckless disregard for
a substantial risk to plaintiff.
Based on the record before us, we find no reason to question
the trial court s finding that Porcaro manifestly intended to cause
harm to plaintiff.
Defendant next maintains that plaintiff s loss is not covered
under insurance agreement (A) of the bond, which is cited above.
Defendant argues that the subject loss arises out of a loan and
that Porcaro neither acted in collusion with Vincenzo nor obtained
a financial benefit with a value of $2,500. In response, plaintiff
contends that the trial court properly held that its losses were
covered under insuring agreement (A). Plaintiff further asserts
that, because there is no evidence that the subject loss resulted
from a loan, it does not have to provide evidence of Porcaro s
collusion with Vincenzo or a financial benefit of over $2,500 to
him.
We find that a case cited by plaintiff, First National Bank
v. Insurance Co. of North America, 424 F.2d 312 (7th Cir. 1970),
provides this court with sufficient guidance in addressing
plaintiff s unlikely contention that, in effect, the overdrafts on
Vincenzo s account were loans. In First National Bank, a customer
of the bank engaged in a check-kiting scheme, which resulted in a
negative balance in the customer s account and a loss to the bank.
As a result, the bank sought coverage for the loss under the
fidelity bond issued by the defendant insurer. Defendant refused
payment, maintaining that the bank s losses were loans, which were
precluded from coverage under the bond. In denying defendant s
argument, the First National Bank court wrote:
"It is unlikely, then, that Decatur intended to make open-
ended, unsecured loans to Community [the customer] by allowing
it credit against deposits that were not only uncollected but
not even covered by funds in the drawee bank. A loan implies
an agreement, a meeting of the minds. Mildly stated, it does
not comport with the usual understanding to say that every
time one person wrongfully obtains property from another and
thus becomes legally obligated to restore it, he has succeeded
in obtaining a loan from his victim. [First National Bank, 424 F.2d at 316.] In the words of the Eighth Circuit: 'It is not
conceivable to us that any disinterested banker, insurance
underwriter, or lawyer would construe the word "loan," as used
in the exclusion clause of this indemnity bond, to cover the
obligation imposed by law to reimburse a bank for money or
credit obtained through the use of worthless checks.' " First
National Bank, 424 F.2d at 316, quoting Hartford Accident &
Indemnity Co. v. Federal Deposit Insurance Corp., 204 F.2d 933, 937 (8th Cir. 1953).
Similarly, we see no evidence of a meeting of the minds between
plaintiff and Vincenzo necessary for a finding that the subject
losses were in fact loans. We share the First National Bank
court s view that any professional who dealt in such matters would
not construe the term "loan" to include the losses arising from
Vincenzo s check-kiting scheme.
Defendant s citations to Pacenta v. American Savings Bank, 195
Ill. App. 3d 808 (1990), and section 4--401 of the Uniform
Commercial Code (UCC) (810 ILCS 5/4--401 (West 1994)) are not
persuasive. Neither Pacenta nor section 4--401 addresses
situations involving check-kiting schemes, and they are of little
relevance here. Further, Affiliated Bank/Morton Grove v. Hartford
Accident & Indemnity Co., No. 91C4446 (N.D. Ill. April 23, 1992)
(mem. op.), is an unpublished disposition and, thus, is of no
precedential value in this matter.
We find that the trial court properly found that the subject
losses did not arise out of loans. An opposite conclusion would
strain credulity beyond the breaking point. Because of this
determination, we do not need to address the issue of whether there
was sufficient evidence of Porcaro s collusion or his receiving a
benefit of over $2,500 as a result of his part in the situation.
Defendant s third argument is that the trial court erroneously
granted plaintiff s motion for summary judgment as to defendant s
second affirmative defense, which was based on the above-cited
exclusion (e). Defendant maintains that even if the overdrafts are
not loans courts in other jurisdictions have held that losses
incurred in check-kiting schemes are excluded from coverage under
the exclusions similar to the subject exclusion (e). In response,
plaintiff argues that the trial court was correct in granting
summary judgment as to defendant s second affirmative defense and
properly held that the losses sustained by plaintiff were not loans
as contemplated in the bond.
An insurance policy s construction presents a question of law,
which can be disposed of by summary judgment. Hettenhausen v.
Economy Fire & Casualty Co., 154 Ill. App. 3d 488, 491 (1987).
Summary judgment is also applicable where the assertion of an
affirmative defense creates an issue of law. City National Bank
v. Reiman, 236 Ill. App. 3d 1080, 1090-91 (1992).
The basis of defendant s argument is the case of First Texas
Savings Association v. Reliance Insurance Co., 950 F.2d 1171 (5th
Cir. 1992), which is readily distinguishable from the instant
appeal. In First Texas, a customer of the savings association,
Norman Rosenstein, represented that he was extremely wealthy and
that "he required special attention to conduct his real estate and
securities trading businesses." First Texas, 950 F.2d at 1172.
First Texas s employees believed Rosenstein and afforded him
"special privileges that included immediate access to funds from
deposited checks and a 'pay-all' computer code that allowed
Rosenstein to draw on his accounts even when the funds in those
accounts were insufficient to cover the withdrawals." First Texas,
950 F.2d at 1172-73. This arrangement, which lasted from 1982 to
1984, covered hundreds of overdrafts totaling millions of dollars.
In fact, Rosenstein was not an extremely wealthy person.
Instead he was involved in a check-kiting scheme in which he was
using First Texas money to finance large security investments.
Eventually, the scheme collapsed, and First Texas was left with a
loss of $8.6 million.
The district court denied defendant s motion for summary
judgment, wherein the defendant had argued that the loan exclusion
clause applied to check-kiting schemes.
On appeal, the First Texas court disagreed with the district
court s denial of defendant s motion for summary judgment due to
the "unique facts of the case." In finding that the district court
had erred in denying defendant s motion for summary judgment, the
First Texas court stated, inter alia:
"In the typical check-kiting case, the kiter falsely
represents that his deposits are supported with sufficient
funds in the accounts on which the deposited checks are drawn.
But here, as the district court recognized, the evidence
confirms that First Texas, because of the events preceding the
loss in November 1984, knew of Rosenstein s practice of
overdrawing his accounts and kiting checks.
* * *
*** Because it is uncontroverted that First Texas relied
solely on Rosenstein s promise to repay overdrafts when it
granted him immediate access to the funds represented by his
check deposits, we find that First Texas made a 'loan or
transaction in the nature of a loan or extension of credit' as
a matter of law. The [subject] Loan Exclusion clause excludes
losses from these transactions." First Texas, 950 F.2d at
1176-77.
We find that First Texas is factually inapplicable to the
appeal at bar. The First Texas court admitted that it based its
decision on the unique facts of the case, the implication being
that if the typical check-kiting scheme were involved, it would
not have reversed the district court s denial of defendant s
summary judgment motion
Moreover, Rosenstein s actions in First Texas are far
different from Vincenzo s in the instant appeal. Rosenstein told
the First Texas officials that he was an extremely wealthy
individual, who required special attention to conduct his business.
Relying on these representations, First Texas granted Rosenstein
special privileges, including allowing him to draw on accounts even
when funds in those accounts were not sufficient to cover
withdrawals. In effect, First Texas actively promoted Rosenstein s
check-kiting scheme, which lasted over two years.
Here, Vincenzo made no such statements to plaintiff s
employees concerning his "extreme wealth." Thus, there was no
corresponding reliance on such a representation by plaintiff, a
factor emphasized by the First Texas court. Further, Vincenzo was
granted no special privileges and plaintiff s employees, outside of
Porcaro, did nothing to aid and abet the check-kiting scheme.
Also, Rosenstein s scheme was allowed to last over two years, while
Vincenzo s scheme, when finally uncovered by plaintiff s officials,
was terminated immediately. For these reasons, we find that First
Texas is of no support to defendant s contention, and we conclude
that the trial court did not err in granting plaintiff s motion for
summary judgment as to defendant s second affirmative defense.
Defendant s final argument is that the above-cited exclusion
(o) of the bond further excludes the subject loss from coverage.
In response, plaintiff concedes that exclusion (o), the check-
kiting exclusion, would normally exclude check-kiting loss.
However, plaintiff asserts that defendant ignores the fact that
exclusion (o) precludes coverage for check-kiting losses "except
when covered under Insuring Agreement (A)."
As has been demonstrated above, the trial court properly found
that the subject losses were covered under Insuring Agreement (A).
Thus, exclusion (o) does not preclude the subject check-kiting
losses from coverage.
For reasons stated above, we affirm the judgment of the
circuit court of Du Page County.
Affirmed.
BOWMAN and THOMAS, JJ., concur.